Friday, October 17, 2008

Falling prices create havoc in the oil patch

Frank Sesno, who did that CNN special on peak oil, We Were Warned, was on CNN last night, talking about the down side to lower oil prices. From the transcript:

WOLF BLITZER: Call it, perhaps, the one bright spot in an otherwise bleak economy -- that would be the price of oil. Even after climbing $2 a barrel today, the price of a barrel of crude oil is still down some 50 percent from an all time high back in July.

Our special correspondent, Frank Sesno, is looking at this story for us.

What does it mean for businesses, for you and me, for all our viewers out there, if we see this price per barrel going down?

FRANK SESNO, CNN SPECIAL CORRESPONDENT: Well, Wolf, you're quite right. We commonly look at this as the silver lining in an otherwise lousy economic cloud, right?

And the price of oil has dropped dramatically, as we've seen, just in the last several months. Wolf, you got that.

So let's take a look at what's happened. In July, $145 a barrel. Look what it is now. We're down to $74 a barrel.

So if you were going to the pump, you'd be experiencing something like this -- the cost of gasoline by the gallon has gone from $4.15 -- $4.11 at the high, actually -- down, according to the AAA, $3.04 today.

If you had, Wolf, a three quarter ton Chevy Suburban and you went to fill it up -- 39 gallons -- it would have cost you $160 this summer.

Today, what would it cost you?

It would cost you about $118. That's a really big savings.

But Wolf, as you said, there's a downside to all of this. And the downside, believe it or not, is to those companies that have been making all this money because it's expensive to do the business they do. They say that they spend close to $200 billion a year in exploration. That's drilling, but it's also looking for the stuff out there. And deep water, for example, just by itself, one platform out in the deep water is about a billion dollars. If you want to look at alternatives and what things are costing, you need $65 a barrel to cover those oil sands. You need close to that for this cellulosic ethanol that we keep hearing about that's going to be the deliverance for the future.

These falling prices are creating havoc in the oil patch. Wolf, according to the people that I'm talking to, there's some anecdotal evidence that companies are starting to cut back on their exploration budgets, cut back on some of the purchases that they may make. It's happened before in '98, '99, when prices went way down, companies went bust, they merged and there were thousands of layoffs, and, in some cases, oil exploration went down 70 percent or more.

Why does it matter?

Because this is what pays for the future oil supplies. And if you're Barack Obama, it's what may pay for your alternative energy programs and that thousand dollar per family tax that he wants.

So there could be some serious unintended consequences.

BLITZER: Yes. So it's interesting, I guess, though, for those of us who remember, a barrel of oil when it was $10 or $20 or $30 a barrel...

SESNO: Remember that?

BLITZER: ...$70 a barrel still sounds pretty high...

SESNO: Yes.

BLITZER: ...although it's not as high as $140 a barrel.

SESNO: I went by the gas station the other day and I'm saying oh my gosh, it's going to come under $3 a gallon for regular. That's incredible. It seems like a bargain. But not very long ago...

BLITZER: It seems like a bargain when it was $4 a barrel, but a lot of us remember $2 a gallon, too.

SESNO: That's right. It ripples through in jet fuel. It ripples through in home heating oil. It ripples through in all sorts of other things. That's good news for the consumer, but we need this stuff for the future.